Behavioral Economics Criticism

What is Behavioral Economics?

Behavioral economics attempts to explain the decision making process of individuals and furthermore challenges the commonly accepted notion that individuals act rationally. One of the fundamental notions of neoclassical economics is that people act in a rational manner when making market decisions. Behavioral economics seeks to counter this by showing the limitations of the accepted "rationality" of individuals.

The basis for behavioral economics attempts to show the bounds and limitations for the assumption of rationality of people's actions in the market.

Irrationality of Behavioral Economic Experiments

Experiments can be extremely valuable in the scientific world when analyzing things such as gravity and magnetism. In the lab, you always know if you drop a ball it will fall to the ground, and this will be true for the world outside the laboratory as well. Economists are trying to use experiments done with humans to explain actions of the outside world. Unfortunately, economic experiments are not the same as scientific experiments. What is shown in an economic experiment in a laboratory will not always coincide with what is really occurring in the real world. There are four major reason as to why it is not feasible to extrapolate laboratory results to the outside world.

1. Subjects know they are being watched
2. Ability for experiments to be controlled
3. Small stakes
4. Ability for subjects to be self-selecting

• Subjects know they are being watched

A large aspect of analyzing economic experiments is looking if subjects make moral or wealth-maximizing choices. People are easily influenced if they know they are making decisions in an "artificial environment". It is human nature to act morally if you know you are being watched and judged by an experimenter. In the real world, people are not being watched and therefore will be less inclined to act unselfishly.

• Ability for experiments to be controlled

Experimenters have the ability to manipulate and make slight changes to experiments to get the subjects to act in a certain way. A common example given is with regards to the prisoners dilemma game. By using differing words such as "opponent" instead of "partner", the subject will have a tendency to react different ways. Another example given was when a public goods experiment was conducted in many different communities. The results that came were different in many of the communities. Communities that had a culture of sharing returned results of people acting morally and unselfish, while other communities that were not as tight-knit produced results of self-maximizing.

• Small stakes

While taking part in an economic experiment, the stakes and cost of making certain decisions are very small for the subject. There is not a very large effect on the subject whether they make one decision or not in an laboratory experiment. Obviously in the real world that are serious consequences and costs when people make decisions. Therefore it is difficult to extrapolate results from laboratory experiments into the real world.

• Ability for subjects to be self-selecting

Not all subjects are analyzed in experiments are selected and therefore many subjects are volunteers that are interested in the subject. These people are typically "scientific do-gooders" who have a tendency to want to appease the experimenter and "seek social approval". This obviously does not coincide with the outside world. In the real world, the people making decisions in the market place environment are extremely knowledgeable and have great experience acting in this environment. Subjects performing the laboratory experiments do not have this expertise and will not be a good representation of what is actually going on in the outside world.

Economists are not disregarding behavioral economics totally. They feel that it is progressing but by no means is it in position to remove or take place of orthodox economics. Behavioral economics has made many strides in explaining individual consumer's decision making, but there is so much more to economics than that. Being able to explain individual decisions is not enough to make behavioral economics a wide spread phenomenon.

Many behavioral economists are claiming that this is a revolution, but the truth is that it has been around for a while and is well known by all economists, but is simply not being widely accepted. It is not reliable enough to explain complex systems such as financial crisis. Economists stated there should be more of a balance between "sophisticated modelling of individual behaviour and more sophisticated modelling of economic systems". Critics of behavioral economics raise the point that behavioral economists are too vague with their studies. There have been studies arising that have evidence contradicting some accepted themes of orthodox economics, but they have been unable to develop those studies into a complete theory that is better than the current one.

According to the studies of behavioral economics, there results from laboratory experiments shows there is no free-rider problem in public goods games. Then why does not more people stop driving cars to reduce carbon emmissions? There obviously are situations in the real world which counteract this experiment's results.